AS PROFESSIONALS AND BUSINESS PEOPLE, most of us have been taught that a deal is not a deal worth having until it has been negotiated to the "nth" degree and every last bit of wiggle room has been captured. The back and forth is what makes us feel like we’ve gotten what we want, on our terms.
Dental transactions are no different, and many deal points are rigorously negotiated during the transition process. Often there is little regard given to the impact of an overnegotiation. (Granted, there are plenty of legitimate negotiations that happen during a practice transition process. There is no way that all the terms of a deal can come together without input, but those discussions are for another day.) Today we’re going to discuss the purchase price. The purchase price is the most common point of needless negotiation that can lead to lasting damage to the parties and the practice. Bear with me here because it may not be as obvious as it appears.
In today’s dental industry there are plenty of reputable practice transition companies that follow time-tested methods for determining a practice’s value. If a practice owner orders three separate appraisals and those appraisals are supported by the same financials along with site visits, the values should come fairly close. However, a value in the absence of a reputable transition company might be off the mark. Sellers tend to overvalue their practice and buyers tend to undervalue a practice. Obtaining an appraisal from a reputable company can give both buyer and seller the peace of mind that they obtained a fair determination of value. Of this value, the vast majority will be allocated to the goodwill of the practice, which is the intangible relationship the seller has with the community and patients.
How can a buyer protect his or her investment, help ensure the successful transfer of goodwill, and gain a strong ally in transferring the goodwill? Tender a full price offer.
Having established the fact that with a reputable appraisal the price will be a good determination of value, the buyer can benefit in a number of ways by tendering a full price offer. First, it’s an immediate boost to the goodwill between buyer and seller. By offering the full purchase price, the buyer is showing the seller that he or she sees the value in what the seller has built. Second, if the practice sale is due to extenuating circumstances, the buyer can become a hero in the community by doing the right thing to help a colleague in a bad situation. Third, and perhaps most important, the buyer creates the best cheerleader of all—a happy seller. A happy seller will go out of his or her way to make sure the buyer is as successful as possible, talking about the buyer in the community and introducing patients to the buyer, all while knowing the buyer saw the full value in the practice. A full price offer is cheap insurance for a smooth transition and complete transfer of goodwill.
Thanks to the magic of amortization, the impact of the full price offer to the buyer is spread out over time. Practice transition loans are commonly granted for a 10-year period; thus, the impact of the full price offer is equally spread over the period of the acquisition loan repayment.
Let’s look at an example: If a practice is listed at a price of $680,000, a loan at 4.5% interest over a 10-year period carries monthly payments of $7,047, or $352.35 per day assuming there are 20 days worked per month. If a buyer is to successfully negotiate a practice price down to $600,000 after a drawn-out battle, at the same rate and term, the monthly payment would be $6,218, or $310.90 per day. This is a difference of $41.45 per workday, less than one extra procedure a day. Is this worth the risk of winning the price war, putting off the seller, or losing the practice opportunity?
It’s easy to become caught up in price, and there are legitimate situations where practices are overvalued. Reputable practice brokers can advise buyers and sellers if a price is reasonable. If you’re a buyer and you have a reasonable price on the table, consider a full price offer. The advantages you can gain from an extra procedure a day will be the best investment you can make in your practice transition.
Originally published in Dental Economics, July 2016